Commodities Correction: Painful but Healthy

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...The fall in the price of oil futures from a high of $147 per barrel to $113 per barrel has been a headwind for the energy sector, but it seems investors have sold the sector without regard for price or value. Such a scenario usually presents attractive opportunities for long-term investors...

Faced with slowing global growth, macro investors began dumping commodities and commodity-related stocks, with small- and mid-cap stocks hurt the most. This commodities sell-off, which began in July and has continued into August, also corresponds to the long-term seasonal cycle in which prices for many commodities tend to bottom out in late summer before rebounding in the fall.

The unwinding of the long energy/short financials trade also has been a big driver of recent share price performance. The combination of rules to eliminate naked short selling on financial stocks, a backlash against higher commodity prices and potential government intervention aimed at speculators in the futures market, along with calls for pension funds to divest their commodity holdings, all converged in mid-July.

The recent decline in energy stocks was swift and severe and is likely overdone.

The fall in the price of oil futures from a high of $147 per barrel to $113 per barrel has been a headwind for the energy sector, but it seems investors have sold the sector without regard for price or value. Such a scenario usually presents attractive opportunities for long-term investors...

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